Downer EDI Limited (ASX:DOW), which is in the commercial services business, and is based in Australia, saw a decent share price growth in the teens level on the ASX over the last few months. As a mid-cap stock with high coverage by analysts, you could assume any recent changes in the company’s outlook is already priced into the stock. However, what if the stock is still a bargain? Let’s examine Downer EDI’s valuation and outlook in more detail to determine if there’s still a bargain opportunity.
What is Downer EDI worth?
The stock seems fairly valued at the moment according to my valuation model. It’s trading around 6.94% above my intrinsic value, which means if you buy Downer EDI today, you’d be paying a relatively reasonable price for it. And if you believe the company’s true value is A$8.23, then there isn’t really any room for the share price grow beyond what it’s currently trading. Furthermore, Downer EDI’s low beta implies that the stock is less volatile than the wider market.
What kind of growth will Downer EDI generate?
Investors looking for growth in their portfolio may want to consider the prospects of a company before buying its shares. Although value investors would argue that it’s the intrinsic value relative to the price that matter the most, a more compelling investment thesis would be high growth potential at a cheap price. Downer EDI’s earnings over the next few years are expected to increase by 36%, indicating a highly optimistic future ahead. This should lead to more robust cash flows, feeding into a higher share value.
What this means for you:
Are you a shareholder? DOW’s optimistic future growth appears to have been factored into the current share price, with shares trading around its fair value. However, there are also other important factors which we haven’t considered today, such as the track record of its management team. Have these factors changed since the last time you looked at the stock? Will you have enough conviction to buy should the price fluctuates below the true value?
Are you a potential investor? If you’ve been keeping tabs on DOW, now may not be the most optimal time to buy, given it is trading around its fair value. However, the optimistic prospect is encouraging for the company, which means it’s worth further examining other factors such as the strength of its balance sheet, in order to take advantage of the next price drop.
Price is just the tip of the iceberg. Dig deeper into what truly matters – the fundamentals – before you make a decision on Downer EDI. You can find everything you need to know about Downer EDI in the latest infographic research report. If you are no longer interested in Downer EDI, you can use our free platform to see my list of over 50 other stocks with a high growth potential.
If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
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